This document provides an overview of simple exponential smoothing, a technique for forecasting future values based on past observations. It describes the basic smoothing equation used in the method and notes that simple exponential smoothing is best for data without trends or seasonality. The document then outlines the steps for applying simple exponential smoothing, including setting objectives, building a model using software, evaluating the model's accuracy, and using the model to generate forecasts. An example using mortgage rate data demonstrates how to implement the method.

1. Simple Exponential Smoothing Lesson #3 Simple Exponential Smoothing Method Copyright 2010 DeepThought, Inc. 1

3. Estimates a smoothing equation

4. Uses the estimated smoothing equation to forecast future values

5. Method format:

6. F(t+1) = a × X(t) + (1-a) × F(t)Copyright 2010 DeepThought, Inc. 2

8. Fits a smoothing equation to data

9. Estimating a smoothing equation which minimizes the errors between actual data points and model estimates

10. When to use method

11. Data has no trend or seasonality

12. Data is stationary

13. When not to use

14. Data exhibits pattern such as trend, seasonality, cyclicalityCopyright 2010 DeepThought, Inc. 3

15. Simple Exponential Smoothing Forecasting Steps Set an objective Build model Evaluate model Use model Copyright 2010 DeepThought, Inc. 4

17. Simple exponential smoothing allows to test whether a smoothing technique works as a model. Objectives should take that principal under consideration

18. Example objectives for 30-Year Conventional Mortgage Rate (see next slide):

19. Test if 30 Yr. Mortgage Rate can be fit to a simple exponential smoothing model

20. If 30 Yr. Mortgage Rate exhibits a statistically significant fit, review and interpret results

21. If model looks good, create a forecast based off modelCopyright 2010 DeepThought, Inc. 5

22. Simple Exponential Smoothing Example: 30-Year Conventional Mortgage Rate Copyright 2010 DeepThought, Inc. 6

23. Simple Exponential Smoothing Adjust Time Frame Copyright 2010 DeepThought, Inc. 7

26. Mean

27. Variance & Standard Deviation

28. Accuracy / Error

29. SSE

30. RMSE

31. MAPE

32. R2; Adjusted R2

33. Statistical Significance

34. F-Test

35. P-Value F-TestCopyright 2010 DeepThought, Inc. 9

37. 5.88

38. Variance

39. 0.34

40. Standard Deviation

41. 0.58Copyright 2010 DeepThought, Inc. 10

43. 1.97

44. RMSE

45. 0.22

46. MAPE

47. 2.78%

48. R2; Adjusted R2

49. 84.80%

50. 84.39%Copyright 2010 DeepThought, Inc. 11

52. 55.80

53. P-Value F-Test

54. 0.000021Copyright 2010 DeepThought, Inc. 12

56. Will use accuracy/error statistics to compare multiple models to find best modelsCopyright 2010 DeepThought, Inc. 13

58. Answer objectivesCopyright 2010 DeepThought, Inc. 14

60. 4.888234437Copyright 2010 DeepThought, Inc. 15